The urgent need to upgrade the grid

SAN FRANCISCO (MarketWatch) -- Flip on the lights, zap
the coffee, check the charge on the cell phone -- all part
of an increasingly energized morning routine in millions
of homes.

Electricity demand is growing at about 1% a year, according
to the U.S. Energy Department, and is likely to hold that
pace despite a sluggish economy. That's because of demographic
growth -- more people -- and the explosion in the numbers
and types of electronic devices now considered essential.

Meeting that demand focuses inevitably on power generation.
But power is useless without the vast transmission networks
that carry it to end-users. Those networks draw on 100-year-old
technology and high-voltage lines, most of which were installed
in the 1950s and '60s

It is a fragile system struggling to keep pace with the
times. When it fails, as it did spectacularly in the Northeast
in 2003, it costs businesses millions of dollars in lost
goods and productivity. It also raises huge safety concerns.

During the go-go years of deregulation a decade ago, huge
amounts of money were thrown at building power plants while
investments in the grid lagged. Overloaded lines and serious
reliability problems were the result.

Those weaknesses are now being addressed. The Edison Electric
Institute reported transmission investments by publicly-traded
utilities jumped last year to $7.8 billion from $2 billion
in 1997. Over 240 miles of much-needed high-voltage lines
have been added in the Western states alone in just the
past year.

That doesn't mean the grid is anywhere close to where it
needs to be, however. Power transmission into Southern California
remains a concern, for example, since the region still relies
heavily on energy generated at plants as far away as Washington
and Wyoming.

Cost is another concern. Soaring fuel prices at coal and
natural gas-fired power plants are pushing electricity prices
sharply higher.

This is a huge catalyst in the development of "smarter"
power grids that give regional operators a quicker, clearer
view of conditions on the system and the ability to remotely
reach out to better manage the flow of power.

But the system also faces financial challenges that are
every bit as tough to solve as the technological challenges.

Maintenance of the transmission system is still primarily
the responsibility of regional power companies. Operational
standards, set for years by the North American Electric
Reliability Corporation, first became mandatory and enforceable
a year ago. But it's still in the utilities' own interest
to make sure everything is up and running. They can't make
money if the lines are down. But the cost of upgrading the
transmission system is high.

Ultimately the cost is borne by ratepayers -- the industry's
term for the businesses and homeowners who pay the bills.

State utility commissions and the Federal Energy Regulatory
Commission, which oversees interstate power and gas commerce,
are often reluctant to raise rates -- a guaranteed political
hot potato -- which slows the flow of funding to transmission
projects.

Streamlining the regulatory process is therefore essential
to ensuring utilities a reasonable rate of recovery on their
investments while assuring the public they are not being
preyed upon by unbridled monopolies.

Privatization could be one way around the stalemate. There
have been several proposals aimed at putting transmission
lines in private hands. Some states have already "unbundled"
the grid, allowing companies to own and operate transmission
lines much like transport companies with no stake in power
generation or sales to end-users.

But privatization still doesn't solve thorny regulatory
issues. It merely adds another layer.

Meanwhile, some of the most innovative thinking on transmission
grids is coming from entrepreneurs well outside the traditional
utility industry. Efforts to reduce the nation's carbon
footprint and meet growing energy demand have turned this
into one of the hottest fields for venture capitalists,
attracting billions of dollars. Expectations are high that
their combined efforts will spawn the next generation of
grid upgrades. Fitting all the pieces together, the technology,
capital and regulatory regime, is a daunting task. Progress
is clearly being made. Much more is needed. Failure to keep
pace with domestic requirements would leave the country
in the lurch, with an economy leaning on a creaky electrical
infrastructure. Excelling at the task would give the country
a much-needed competitive boost in the global arena. End
of Story